Good afternoon. I'm Louis de Palma. I cover aerospace and defense on William Blair's equity research team. A lot of familiar faces in the audience. This is the second day of the 46th annual William Blair Growth Stock Conference, and we're pleased to be hosting a presentation slash fireside chat with AAR's management team. Joining me today are Chairman, President, and CEO John Holmes, and in the audience CFO Dylan Wollin and Vice President of Investor Relations Chris Tillett. Following the presentation, we will move for a more in-depth discussion in the Adler room on the second floor.

I am required to inform the audience that a complete list of conflicts of interest and disclosures are available on our website at williamblair.com and thanks John take it away all right thanks Louie I'm required to tell you all of this here in the forward looking statements but there is other one one other statement I want to make before I get into the market and that is I'm very proud to say that I'm a William Blair alum I started my career here coming out of the University of Illinois in 1999 and joined the William Blair investment banking team and that That is actually what led me to AAR, because AAR was and is a William Blair client. So it's cool to be up here. I'm going to talk for about 10 minutes, I could talk for a lot longer, but I'm going to go quickly through some slides and then Louie and I will do questions. But the messages that we want to convey or that I want to convey today are, AAR has been around for a long time, we've been in business since 1955. I think we are known for certain things in the market, but we have been doing a lot of work to transform the company over the last several years so we've repositioned the portfolio we've really doubled down on building a differentiated culture we have a more focused strategy than ever and we have been and will continue to deliver faster more profitable growth sorry i gotta move this so i can see the slides here here's um some uh some stats on the company obviously publicly traded uh ltm sales of 3.1 billion across 3 billion for the first time ever We are at about 8,000 members of the team at about 12% EBITDA margins, which we are increasing. An important thing to note about AAR is we are balanced between government and commercial. About 70% of the company is commercial. About 30% is government. Being in the government space in times like we're in right now is a very good thing. I'll talk about that in a minute. We are geographically diverse with a concentration in North America. And we recently resegmented the company. We report in four segments, parts supply, repair and engineering, government solutions, and we have a fourth segment, legacy commercial programs. As the name implies, this is a set of contracts and businesses that are a set of contracts with airlines that we are winding down over time. That's a market that we've been talking about for the last several years moving away from us. We have a number of contracts that are not performing at the new, I would say, requirements that we have for the business. We have a fair amount of inventory tied up supporting them, and so we're going to exit those, liquidate the inventory, and you'll see how it's accretive to us over time. So talking about the transformation, if I think about the years I became CEO in 2018, if I think about the years of change that we've been through, one of the things that occurred to the team and I early on was what you decide not to do is just as important as what you decide to do. And so we spent the first several years adjusting the portfolio and restructuring and getting out of things. AAR years ago was a much more diverse business mix. There was not a lot of connection between the businesses we were in. We were a much lower margin. And in short, we were small and complex. And that's not a very good combination. So we wanted to simplify the portfolio, exiting a number of things. We've had a number of divestitures, exited a number of contracts. That commercial programs piece that I mentioned, the new segment, that's kind of the last piece in terms of what we're exiting. But now that we've got ourselves down to a core, we've been focused on building from there. And the key to everything, and you'll hear this over and over again, is just focus. Focus on certain markets, focus on certain customers, focus on certain aircraft types, and really becoming leaders in the areas that we decide to serve. And so today those areas that we want to move into or have been moving into are three and I'm going to talk about these in depth parts repair and software this is the strategy of the company parts repair and software we sell parts both new and used we sell repairs and we sell software that allows our customers around the world to plan for and buy the parts and repairs that we sell this is unique value chain in the industry i'll talk about why it's unique in a minute but we're building something that does not exist uh anywhere else and it's been working i love this chart these are good numbers um we've been averaging a 15 kegger over the last few years we've expanding our ebitda margins on average about one point per year same thing with our operating income and our eps thanks to the expanded margins has been tracking ahead so again i'm going through like an hour's worth of material here in 10 minutes so apologize for going fast one thing i didn't want to i didn't want to forget was our culture we are involved in safety of flight we are involved in critical services delivering to airlines around the world and it's very very important that we have an unbelievably strong culture in the company and that's something i'm particularly proud of having driven over the last eight years in this role is a very strong culture built obviously on a great foundation by my predecessor David it starts with quality first safety always and it ends with own it we're a big company but we're not that big and so every one of us all 8,000 of us on the team I've got to show up every day and own the actions that we take speaking of our customers we've got a great customer base we work with all the blue chips airlines around the world you can see some of them they're very proud of our relationships with their Canada, United, Delta, Alaska and others we through our distribution business that I'll talk about have a number of wonderful relationships that we're very proud of with the largest OEMs in the world and we also do as I mentioned a fair amount of government business with not only the US government but also international governments. I'll skip this but we win and I'll get it we win for a number of reasons this is a summary slide and I'll get into why we win here with these individual slides. So parts repair and software so let's talk about parts for a second. So two activities inside of parts. The first is new parts distribution and the second is USM. I'll talk about USM first. USM is used material. This is the original business that started AAR 70 years ago, buying used aircrafts and engines, tearing them down, repairing the parts and reselling the parts. It's a great business because it's highly transactional. It keeps us in touch with the markets. We know how asset values are moving. We know what's in demand etc but it's not the future of AAR that has been mixing down over a period of time we're keeping the business relatively the same size but as a percentage of sales it's less than 15% now the future in the parts business for us is new parts distribution new parts distribution has been growing at between 25 and 30 percent kegger organically over the last four years that's well above market we expect above market growth to continue and that is because we have a unique model we are two-way exclusive meaning we do not represent competing product for an OEM that we represent in the market and that OEM does not use a competing distributor and this allows us to get incredibly technically efficient with the OEMs that we partner with and help them take market share this is very different than our competitors which are traditional stocking distributors buy a bunch of inventory put it in warehouses around the world and essentially operate a call center we are true extensions of our oem partners in the and the aftermarket and this model is resonating three or four years ago we weren't known for this we are now and the opportunity set that we see for ourselves in distribution is going to drive continued growth above market repair two activities inside of repair first is heavy maintenance heavy maintenance again i think there's a kind of conception that this is a lower margin me too business we have become top three in the world the leaders in north american heavy maintenance we turn aircraft faster than anybody else we have the best set of contracts with the best set of customers we recently made an acquisition in this space we bought our largest competitor here in north america we've got close to a 50 market share in north america and we are sold out through the end of the decade because of the quality of our work it's important to note that our focus is narrow bodies those aircraft 737s a320 that maintenance has to get done here they can't go to Asia they can't go to Europe that has to get done here and so we've got a great customer base locally that allows us to leverage this position into other areas one example of leveraging this leadership position for for heavy maintenance is in component repair heavy maintenance is a low teens EBITDA business component repair is a high teens EBITDA business our strategy is to leverage our leadership position in heavy maintenance to capture more component maintenance and I'm sure we'll talk about that later. Those things go together. The last thing I want to talk about is the software piece. We've talked about parts, we've talked about repair, and now we'll talk about software. And Louis has done a great job of covering the software element of our strategy but it all started about three years ago when we made an acquisition in the software space called Trax. Trax is a maintenance ERP system that's been around for about 25 years. It's used by more than 100 airlines in the world supporting over 6,000 aircraft. And Trax is a next-gen system that allows the airline to manage every element of its maintenance operation, every piece of inventory on the shelf, every piece of inventory installed on an aircraft, every part that's been sent out for repair, where they sent it, what they paid for it, etc., etc., etc. All of that activity and that data is housed in Trax. If you're in the business of selling parts and repair, that is the holy grail of data that you want to have access to. And we are on the desktop of tens of thousands of buyers and planners in airlines around the world who are making these purchasing decisions. The Legacy Tracks is an on-prem system. We have a new offering called EMRO, which is fully SaaS-based. We are transitioning those 100 airlines off of Legacy Tracks to new SaaS-based. And that will be done by the end of 2028. And again, once that data is real-time in the cloud with the SaaS-based offering, that's incredibly powerful to inform the rest of what we do. We bought Trax for a couple of reasons. One, we saw that connection between what Trax does and the data that they house and the repairs and software that we sell. But we also felt that we could grow it. Since we bought Trax, we've been introducing them to new customers around the world. We've gotten them into Thai Airwaves, we've gotten them into Cathay Pacific, we've gotten them into Virgin Atlantic. Three days after this conference last year, we announced that we got them into Delta Airlines. Delta Airlines, along with many of the large legacy carriers, is still on old 40-year-old systems that need to be modernized to Trax. Delta, universally recognized by most airlines as the leader in the world, the fact that they embrace Trax as a solution is a very solid endorsement of the capabilities. A year ago, we were negotiating with them, and today there are over 11,000 people at Delta Airlines using Trax, which is awesome. And we're just getting started in the software business. Two of the quick things there, just want to make sure it's on here. Aerostrat, an acquisition that we made about six months ago. Think of Trax as the operating system. Think of Aerostrat as a really cool app. Aerostrat allows airlines to plan heavy maintenance. They're the leader of the world for heavy maintenance planning. If you're in the business of selling heavy maintenance, it's great that you have software that allows you to see how airlines are planning their heavy maintenance checks. I can go into more detail on that later. And the last thing I want to mention that we launched in April is something called Airvoyant. And this is an AI-driven procurement tool. Buying parts at an airline is an incredibly labor-intensive process. I can describe it later. but airlines are spending 60 billion dollars a year on parts and they're doing it manually they're emailing out spreadsheets it's insane there is no reason why this has to be manual anymore and airvoyant is a solution we launched it and we've been thrilled with the customer receptivity it's not parts preparing and software but I did want to touch on government all of the things that we're doing in the commercial world we are applying to the government space If you can repair a 737, you can repair a C40 or a P8 because those are commercial derivative aircraft. And if you can repair those type of aircraft, you can repair an F16, for example. So all of the commercial know-how that we've built up over the decades, we're applying to the government space. And that goes across parts repair and software. And again, in moments like we're in right now, it's really, really a good thing to have the balance between the government option or government offering and the commercial offering I've talked a little bit about this so I won't dwell on the side but these things fit together we can get into it in the Q of A or Q of A I was going to say Q of E, Q and A but we all of these things go together and again this is a unique value chain in the industry. The last thing I want to do, and then we'll go to Q&A, is we had an investor day a couple of weeks ago when we put out three-year targets for margin growth, et cetera. What I would say about these targets is we had a high, high degree of confidence in achieving these targets, particularly around the margin expansion. There are multiple avenues with which we can achieve this margin expansion. If any combination of those avenues comes true, we can do much better than what's on the page. So I just want to flag that. And with that, do you guys want to go through the appendix? We'll go to Q&A. Fantastic. Thanks, John.

And yeah, I think you actually announced the Delta logo win at this conference last year. But one aspect of that, you just mentioned how there's 11,000 Delta employees that have been onboarded to Trax. What's the ultimate goal, and what's the roadmap for Delta?

So there's a three-year roadmap for Delta. We're one year into it, and we've got two left. And think of it as kind of small, medium, and large. So the small module is largely behind us, and we've started the medium set. And I won't get into the details of it, but the goal was to get TRAX to deploy to a large number of mechanics and employees around Delta, and then gradually increase the functionality that's deployed to them.

Great. And how, in general, do you view TRAX as synergistic with your parts supply and your repair businesses? How is that going to fuel growth other than TRAX in and of itself?

Yeah, great question. So in a couple of ways. First of all, as we move everybody to the cloud, as we have access to that data, and right now we are taking the position that that data is the customers, but we are working with the customers to agree on accessing that data, knowing what inventory is out there, knowing repair data, repair history, et cetera, that will help inform what parts we choose to put on the shelf to supply to them. It will help inform what repair capabilities we want to develop. It will help us win new distributorships. If we go to an OEM and we say, hey, listen, OEM, we want to be your partner in the aftermarket, and by the way, we are on the desktop, the point of sale for thousands of buyers and planners at more than 100 airlines around the world, that is a very powerful statement to make. That's a unique channel to market that other distributors don't have, and that's on top of the two-way exclusive model. So we see a lot of connectivity there. Furthermore, if I think about Airvoyant, not only can we connect the dots in terms of what offerings we have, parts and repair, but we can also automate those transactions. And whether there's a human in the loop or a human kind of around the loop, that's a solution that we're excited to bring to market.

Fantastic. And it seems over the past year that your parts supply business has experienced an acceleration. I'm not sure if you would attribute it to tracks as you're still in the process. So what have been the drivers of that acceleration? And related to that, the pertinent topic is the aftermarket cycle slowing down. and people have been asking that question. Yeah, I'm glad you went there. It's been accelerating.

Yeah, so it's been accelerating for us. We've been growing meaningfully faster than the market and we expect to continue growing faster than the market. The offering and distribution is unique. That two-way exclusive model, we've been at it now for about eight years. It's really gotten traction in the last three or four years. And so we've got a number of case studies when we go in to present OEMs to explain to them, hey, listen, we started out as a $15 million partner with OEMX and we've grown that relationship to $100 million by helping that OEM grow and take market share. We were not known for this a few years ago and we are now. And so those proof points, again, combined with the, you know, the channels to market through tracks are getting a lot of traction. Today, we size the distribution market for ourselves at about $25 billion. We have less than 5% penetration, so we have a lot of headroom, particularly now that we're becoming known for this, and the opportunity set continues to increase. Not only that, but as we scale on the heavy maintenance side and the HACO acquisition that we made a few months ago, as we scale and we see more and more aircraft through our hangars, that's another pitch to OEMs. And I'll give you an example. Let's say you're talking to an OEM that manufactures pumps. And we work on 1,200 aircraft a year in our hangars right now. So we're the largest in North America. So we're seeing 1,200 aircraft. That's 15% of the North American fleet we are maintaining. All right, that's big. And we go to an OEM, we say, okay, you're a pump manufacturer. And you have an upgrade for a pump that's on a particular 737. Well, guess what? We're going to work on 700 or 800 737s in our hangars this year. and we can, at the point of sale, talk to the airline reps who are in the hangar with those aircraft and say, hey, listen, this is an upgrade. We want to upgrade the existing pump that's on the aircraft to a new one. Here are the benefits. Let's pull off those pumps right now and put on yours. And so that, again, is a unique synergy.

Great. And can you walk us through the impact, if any, there has been from, like, the Middle East conflict and high oil prices? Yeah.

So, and I'm sure this is kind of what has been a big topic. So far I would reiterate what we have said most recently at Investor Day. We have not seen any impact. And we would see it in our day-to-day part sales and the day-to-day part sales have been as strong as ever. All right. So we're not seeing it. But more importantly at this stage we would hear it with respect to maintenance schedules. What we would expect to hear now is we would have airlines coming to us saying, listen, we had planned to send you four lines of maintenance starting in the fall after the busy summer flying season. We're going to pull down one of those and you're only going to see three. We are not hearing any of that. So our customers are as bullish as ever on the future. I would say that, and I've had the opportunity over the last two days to spend time with a number of major airline CEOs, and I think over the last 30 days with a lot of airline CEOs, I think that they've all been pleasantly surprised with the amount of pricing power they have on the market. On average, they've been able to pass 30 to 60% of the increase in fuel cost along through ticket pricing. And so they're realizing they have market power given the demand environment that didn't know that they necessarily had, and that's encouraging to them. And it'd be really interesting to see, you know, to the extent that they've achieved certain pricing levels and once that fuel input goes down and comes back to normal i mean that could be a really good thing for the health of the airlines great and in i would say travel demand appears to be one of the big drivers for your commercial um aero business what are you seeing in terms of the trends on on the government side i was going to say you know this this environment not only are we insulated from what's happening for all the reasons i just described but we We actually stand to benefit from it. Because we've got this government exposure, we are seeing an up-tempo in the pace of orders. We saw it last quarter, we were, I'll give you an example, for the government parts business last quarter, we were up 55% organically, so that's a big number. That trend was starting even before the conflict, and we expect that to continue as this administration prioritizes operational readiness. So we're seeing nice increases on the government side. We manufacture pallets, for example. We are the provider of pallets to the U.S. Air Force. These are pallets that are used in moving things around. We've seen, and these orders are public, we've seen a tremendous increase in orders out of that business, and we expect that to continue as well. So we've seen growth on the government side of things. The last point I would make about not just being insulated but actually benefiting from this environment is we are a lower-cost solution. So, as airlines, if they are looking to defray some of the increase in fuel costs, rather than going to an OEM solution, rather than going to another higher cost solution, we have in the cycles that we've existed, seen over time that airlines, when moments like this occur where they're trying to save money, they come to providers like us and we've seen some of those opportunities also.

Yeah, and on the government side, last October there was a protracted shutdown and across our defense coverage there was very slow funding going into the turn of the year. In contrast though, you've seen exceptional government growth.

Would you view that government growth, would you expect it to continue going into the government year-end and has there are there tailwinds in terms of I think you mentioned modernization or would you expect that government growth the material we expect we expect the government growth to continue during the shutdown we did not have any material impact to the the business the programs that we are are on are on critical programs and again the current administration is prioritizing operational readiness and sustainment of the existing fleet and those are the parts and services that we offer to the government, and therefore we've seen an increase. On top of that, we do have a very meaningful pipeline of long-term government programs, bids that we have in the government. You've seen some of those convert in the last couple quarters, which has led to growth, and we've got more of that.

And another topic related to what we were discussing before was the accelerating organic growth on the parts distribution side. What has been the business development activity there in terms of whether OEMs that previously did the distribution themselves, whether they're looking to outsource or whether you can take away contracts from distributors that may be focusing on other portions of their business?

Yeah, great question. The majority of the growth that we have seen in the distribution business has come from taking share from our competitors. And that's been the vast majority. However, what we've found is that when we get into an OEM, we very, let me say a couple We've been at this two-way exclusive strategy now for about ten years, but really eight years at scale. These agreements that we sign are typically five to ten years in length, and we've had a hundred percent renewal rate on these agreements in that period of time. And you have the land and expand. We've got land and expand for sure. so I'll get to that, not only have we renewed them but in the last couple years we have renewed them without even being competed and so the OEM is a partner, they love what we're doing, they extend the existing contract and to your point land and expand, we've added new product lines, new geographies, etc. We've signed a couple of agreements recently on the defense side and the defense side is a really good way in for us, the OEMs it's a challenge for them dealing with the government, We've got a unique set of systems that allow us to plan for and sell parts to the government. It's an easy way into an EOEM. We build a relationship there, and then we move over to the commercial side. As we do more and more of these, again, we become known for this where we weren't before, and people are coming to us and the pipeline's big.

A question that I'm going to ask you, but could also be for Dylan, in terms of your your margin guidance that you outlined at your analyst day. There's a lot of puts and takes between the different segments that you have, whether it's the software, the distribution, and the repair. How do you bridge the gap between your current 13 percent margin and where you expect that to be in three years?

Yeah, I think we're at 12. We put out 13 to 14 percent plus. For us, as I mentioned, we have a very high degree of confidence of getting to that target. As you also cited, there are a number of different areas of the business where margin is expanding. If things come together in the right combination, we can do much better than what we got it And I should also mention that those targets that we put out, that's a waypoint, right? That's not an endpoint. That's a, hey, you know, we're on this journey. You've seen great expansion from us over a period of time. we put out cash flow guidance for the first time these are not these are not endpoints this is hey this is a stop along the way and we expect over time to continue to do better than than all of those targets right and what are the potential sources of margin expansion with the recent HACO acquisition yeah you're doing on the heavy maintenance side yeah great question so just so everybody knows we bought our largest competitor in the US company called HACO on the heavy maintenance side. We are in the process of dramatically restructuring their operations to improve their profitability. When we bought the business at the same time we signed up $850 million worth of heavy maintenance contracts for that business which sold out their hangers for the decade. We actually though even with that brought their revenue down because they were doing a lot of work that's unprofitable. we are in the process of exiting that unprofitable work right-size in the cost base and ultimately we'll have HACO up to the margin that we experience in our other hangars which is low teens what's more is we will improve the margin of our heavy maintenance business overall because as part of HACO we are exiting our highest cost site which is in Indianapolis we will move out of that site transfer that work predominantly to HACO but also other facilities and that That will improve the overall margin profile for the whole group.

And yeah, one final one before we head to the breakout. How do you view improving free cash flow conversion from?

Yeah. So we put out free cash flow targets I think for the first time ever. And we put it at 30% EBITDA. We are still a working capital intensive business given the significant growth in distribution. However, the MRO, the heavy maintenance growth, the component maintenance growth, those are very cash flow healthy business, obviously government as well. But over time, as we scale distribution, the incremental investment required for each new distribution deal will be smaller as a percentage of the base and will improve from there. So again, I would view the 30% as a near term way point, but over time we would expect to Thanks, John. and yeah now we are moving to the breakout in the Adler room on the second floor great thanks for the time everyone